Search advertisers willing to live with click fraud

BenCharny

This is an update of a previously published story. Adds in 24th paragraph that Google says it has never charged for clicks it knows are fraudulent.

SAN FRANCISCO (MarketWatch) -- Frank Watson of Forex Capital Markets has always assumed that some of the people who click on his company's online ads, which are placed alongside Google Inc.'s search results, do so fraudulently.

Late last month, Watson had his assumptions confirmed by an authoritative source -- Google itself.

The world's biggest provider of search advertising told him 20% of such clicks on the ads it places online for his company were fraudulent.

And these were the ones Google caught. Watson estimates there's perhaps another 10% that Google doesn't catch, an assertion which echoes those of Google critics who say the company and its search rivals are under-reporting the practice.

Regardless of the exact number, there's no doubt that advertisers like Watson, who pay up every time an ad gets clicked on, are overpaying Google, Yahoo Inc. and other search firms.

So, is Watson, who runs his company's Internet search and analytics operations, up in arms and re-evaluating his company's spending on Google ads?

Not at all.

"A certain amount of mail goes missing - are you not going to write letters?" Watson says. "Airlines occasionally crash, are you going to stop flying? The answer is no," he says.

And Watson isn't alone in his opinion. An informal MarketWatch survey of Google advertisers suggests they will keep using search-based marketing because, despite clear evidence of click fraud, such ad campaigns still pay off.

"As long as your business is still making money (with it), you're going to keep doing something even if you know there are hazards," Watson said.

In other words, one month after Google began sharing some data on click fraud with advertisers, Watson and others have developed a comfort level with it -- even though research firms such as Outsell in Burlingame, Calif. estimate it costs advertisers between $1.3 billion and $1.8 billion a year.

Like spam that fills email boxes and viruses that crash PC operating systems, click fraud seems to have become accepted as the price of advertising on the Internet.

While that could change if the practice continues to grow, the muted reaction of advertisers refutes the idea that click fraud could prove to be the Achilles heel for Google
GOOG, +0.68%
and its main rival in the search advertising market, Yahoo Inc.
YHOO, +2.20%

"Click fraud is like any other business risk; you should take appropriate steps to reduce the risk and gather firm data of any fraud," said Duncan Perry, a click fraud expert and U.K.-based consultant.

A clandestine weapon

According to those who follow the practice, click fraud is used mainly as a clandestine weapon by advertisers against their rivals. Using automated means, one company will click on its rival's ads to increase the amount they must pay for it.

The practice also skews the effectiveness of an online ad campaign, because it leaves advertisers in the dark about which of its ads are of genuine interest to the customers it hopes to reach.

Click fraud illustrates s how new technologies that improve the effectiveness of a business operation can nevertheless have a down side.

Before the advent of Internet advertising in the late 1990s, advertising was paid for up front, and involved a finite number of ads that were placed on television, radio or in newspapers.

But online ads created a new payment model that required advertisers to pay for an ad only when it is clicked on.

Google and another startup called Overture, which was acquired by Yahoo in July 2003, then pushed Internet advertising a step further. They developed automated systems to serve up a limitless supply of ads that could be placed alongside the results of an Internet search query.

Marketers love these kind of ads because it allows them to deliver their message to people who - through their search request - have already expressed an interest in a related topic and are thus more likely to be receptive to their advertising message.

Google and other search providers hold auctions in which advertisers pay top dollar to have their ads placed next to these search terms. For example, a car company might pay to have its ads appear next to the search results that appear when an Internet user searches for the phrase "new car dealer."

Google refined the technology of its program, called AdWords, so it can now place its ads not only on its own Web pages but on hundreds of thousands of other Internet sites as well.

The explosive growth of this so-called paid search advertising has been a huge boon for the company. Google saw its sales surge 77% to $2.46 billion last quarter, thanks in part to the loyalty of advertisers like Watson. Revenues from the number of online ads it placed almost doubled from a year earlier.

Meanwhile, Internet advertising has grown into a multi-billion dollar a year market, and today about 6% of all the money spent on advertising is spent on the Internet. That figure is expected to double over the next three years, according to U.K.-based Zenith Optimedia Group, a business-intelligence firm.

Opening the door to click fraud

In fact, the phenomenal growth rate of search advertising is one of the reasons it's been targeted by click fraudsters.

Years into the click fraud issue, there's lots of disagreements about its scope.

Google recently began telling its advertisers how often its filters determined that ad clicks were invalid, and, as a result, their accounts weren't charged. According to the company, it has never charged for clicks it knows are fraudulent.

The company so far refuses to divulge how often ads that are clicked upon with fraudulent intent aren't caught by its filters and thus end up costing advertisers money.

When pressed, officials at Google will infer the rate is somewhere in the low- to mid-single digits. Critics, meanwhile, say it can be as high as 50%.

Recently, Google Chief Executive Officer Eric Schmidt said the firm's likely to make such reports available, but didn't say when.

But again, even advertisers whom Google has told that nearly half the clicks on their ads are fraudulent are unwilling to give up search-based marketing.

Consider Life In Asia, a Web site that on some days has a 47% click fraud percentage. Yet David Jemison, the president of Life In Asia, Inc., based in Westlake Village, Calif. has no plans to pare back what he spends on Google advertising.

"Why should I?" he said.

Google's ability to match advertisers with consumers who are more likely to buy their product is something traditional radio, TV, newspaper and magazine advertising can't come close to duplicating.

Nearly every one of the 11 Google advertisers MarketWatch contacted for this story remained pleased with the service, even after Google began reporting the click fraud that its filters catch.

Google Business Product Manager for Trust & Safety Shuman Ghosemajumdar, during an interview, said he would not discuss individual findings because he did not have permission from the individual advertiser to do so.

But, speaking generally, he said "it's perfectly natural for there to be fluctuations in the number of clicks which we will be detecting and filtering out. There are certainly folks that have that attitude," he said.

But he added that not one Google AdWords advertising customer has canceled their service since Google began generating the new click fraud reports.

"My faith in the advertising program is stronger than ever," said Dan O'Brien, the Web master for the Playa El Agua resort located on Margarita Island in Venezuela, who recently discovered that up to 5% of the times an ad of his was clicked, it was for fraudulent or invalid reasons.

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